GOP Lawmakers Debate Online Seller Sales Tax Rules

WASHINGTON (CN) – House Republicans on Tuesday supported calls for congressional action in the wake of the Supreme Court’s decision last month holding states can collect sales tax from out-of-state sellers that do business within their borders.

The ideas batted around at Tuesday’s hearing on how to respond to the court’s decision in South Dakota v. Wayfair ranged from Congress imposing a moratorium on states passing laws allowing them to collect sales taxes from online retailers to a ban on states applying sales tax obligations retroactively.

“The court’s close and incomplete decision in Wayfair has the potential to unleash chaos for consumers and remote sellers, particularly small business sellers,” Rep. Bob Goodlatte, R-Va., said at Tuesday’s House Judiciary Committee hearing.

The Supreme Court’s decision in Wayfair reversed decades of Supreme Court precedent that prevented states from collecting sales tax from out-of-state retailers. This meant the obligation for paying sales tax on such purchases fell on consumers, many of whom never paid either because they didn’t know they were required to or because they knew the state would never come looking for the money.

The boom of online marketplaces meant states were losing anywhere between $8 billion and $33 billion each year, according to a study referenced in Justice Anthony Kennedy’s majority opinion in the case. Frustrated with its budget shortfall, South Dakota passed a law expressly designed to challenge the Supreme Court’s precedent, leading to last month’s 5-4 decision.

The decision has sparked debate about how the federal government should chart the newly opened frontier. While proponents of the court’s decision say it will level the playing field between online and traditional retailers and provide new revenue, critics say it subjects companies to taxes from states in which they have no voice and violates constitutional principles preventing states from interfering in the economies of their neighbors.

Tax reduction advocates on Tuesday told lawmakers they should respond to the court’s decision by putting up guardrails to keep states from burying online retailers under an avalanche of conflicting laws and compliance requirements.

Grover Norquist, the president of Americans for Tax Reform, warned states could use the decision as justification to extend their corporate income taxes to apply to businesses in other states.

“This Pandora’s box that has opened up has one hope, I guess, and that’s that you guys get together and put lines around the damage that can flow from this,” Norquist said Tuesday. “There’s going to be a bunch of damage, it’s not going to be helpful, but you can at least begin to reduce it.”

Andrew Pincus, a partner at the Washington D.C. law firm Mayer Brown, told lawmakers the Supreme Court gave very little guidance to states in the decision, leaving significant room for Congress to set the rules of the new game.

“The Supreme Court decided one thing: physical presence isn’t required,” Pincus said “It then left open five other questions about when a state tax obligation is constitutional and when it’s not.”

One suggestion was for Congress to impose a moratorium on laws that allow states to collect sales taxes from out-of-state retailers.

“I think the moratorium is critical because history shows that without some kind of control, states go off the rails,” Pincus said.

Bartlett Cleland, the general counsel for the American Legislative Exchange Council, said governments are “virtually unrestricted” in the post-Wayfair landscape. He suggested it might be appropriate for Congress or individual states to require state governments to reimburse the costs businesses incur while complying with remote sales tax requirements.

“The government obviously trusts the company to keep track of all this tax for them, how about they keep track of their expenses, the real cost, and submit that to the state every quarter?” Cleland said in an interview after the hearing. “Maybe it’s every year and they don’t pay as much tax. Maybe that’s a tax credit or something. That might be one way.”

But not everyone at Tuesday’s hearing was in favor of Congressional action in response to the court’s decision.

Utah State Sen. Curt Bramble, who is also the past president of the National Conference of State Legislatures, said the states should be allowed to tinker with their own laws.

Noting Congress repeatedly punted on legislation that could have answered the question in Wayfair before the Supreme Court weighed in,  Bramble called on lawmakers to step back and give state governments the chance to design their own tax systems.

“I’m here today to ask Congress, and you Mr. Chair, to continue doing what this committee and Congress has done best on this issue over the last 26 years and that is nothing, to not act,” Bramble said.

Many Democrats on the committee were similarly hesitant to call for sweeping federal legislation, saying Congress should not make the decision to step in on state tax decisions lightly.

“Congress, of course, has a role to play, but in the absence of discriminatory enforcement by the states I’m skeptical for need of congressional intervention on the basis of speculated harms,” Rep. Jerry Nadler, D-N.Y., said at the hearing.

 

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